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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
|
0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
|---|
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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How to Profit From a Muni Bond Crisis |
CNBC - Feb. 10, 2011 - By John Carney
Fears of a massive wave of municipal bond defaults have given rise to a new question: how can investors profit if a nightmare meltdown scenario becomes reality?
The once boring muni bond market has become a hotbed of controversy. Huge public pension liabilities, declining tax revenues, and ballooning budget deficits have created financial challenges for states, cities and towns across America.
Meredith Whitney has famously announced that many muni-bonds are too risky for the meager returns they offer. Jim Chanos backed her up on "Squawk Box" today, arguing that many states are basically insolvent. Others, including some prominent muni-bond experts, have said that these fears are over-stated.
Investors are dividing on the question. Many hedge funds have started looking for bargains in muni bonds, searching for debt that might have been beaten down too far. Some are betting that the federal government will step in to rescue the muni debt market if the stress becomes too extreme.
Hard To Short
There has long been an imbalance in the market. It’s far easier to take a bullish position in muni debt than to take a bearish position. Bullish investors can directly buy muni bonds through brokers, or invest in an almost unlimited number of muni bond funds. Bearish investors cannot easily short muni bonds the way they could, say, short an overpriced stock. Most of the bonds cannot be borrowed—the first step in an ordinary short trade—because they are owned by individuals or mutual funds that don’t hold them in trading accounts.
RELATED LINKS
The Muni Debate: Kicking Sass & Taking Names
S&P: We Do Not Believe States Face a Muni Debt Crisis
This imbalance implies that the pricing in the muni bond market might not reflect the full array of perspectives. At least in theory, this could lead to risk in the muni market being underpriced—and the bonds, therefore, overpriced. And because many of the buyers of muni bonds are “buy and hold” types, the mispricing of this risk could remain invisible for an extended period. What’s more, the disappearance of bond insurance has made pricing even more opaque. Combined, these factors could create a unique investment opportunity for muni bond bears.
Since the bonds cannot be shorted directly, it might be tempting to short them indirectly by buying credit default swaps that would pay off if the bonds default. Unfortunately, this is almost as difficult as the short sales.
Historically, it was possible to buy credit protection on some muni bonds. But all but one of the bond insurers has ceased doing new business. And most credit protection on munis was sold as wraps around the original issuance and is impossible to buy without also buying the bond itself. The few sellers of “naked” muni bond insurance tend to be savvy fund managers who are very careful about the debt they are insuring against, which means that using swaps to short the riskiest muni debt is very expensive if not impossible.
So Short The Insurers
One relatively straight-forward way to take a bearish position on the muni market is to short the big muni bond insurers. The financial crisis, however, totally reshaped this market and the companies that participate in it. Traditionally, around 45 percent to 60 percent of muni debt issued was insured.
For the complete article.
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